The RBI, which has been reeling under the nasty shock of having four government representatives on the Monetary Policy Committee, has found a new friend. Just as Dr Rajan was wondering how to best indicate delicately to the government to leave the RBI alone, he got a call from the President of the Student’s Association at the FTII.

“Don’t worry Sir, we are on our way to Delhi!” yelled the young student on the line.

“And we’re definitely taking up your case! After all, our issues are the same. Government intervention where it’s not needed. We’ve written a letter to the government indicating that the post of a chairperson is an academic one, not an honorary one. Holds for you too, Sir. Just substitute the word chairman with committee. You want me to send you our draft letter? It’s perfect for you, Sir. We’ve further said that we’ve always had chairpersons with credibility. Same for you. So why meddle now? How can the country run with RBI governor discussing interest rates with people randomly appointed by the government? Just look down from your window, Sir, and you’ll see how creatively we’ve represented you problem.”

Rajan looked down from his 18th floor window, where, to his consternation, he found seven seats with question marks atop them, with stones in four of them.

There were also some students painting graffiti on the walls. In red. Heaven help me! “We don’t like the Monitory Policy Committee” And the other one read “Good-bye, Autonomy! Welcome, Autocracy!” Whaaaaaaat!

“Hey, you listen to me..”, he began, suddenly unsure how to react to such a filmy representation of the monetary policy committee issue.

“Brilliant, isn’t it?” shouted the Students’ President in glee. “And we’ve also made banners for you, Sir. Very interesting theme. Game of thrones, Sir. Optionally, do you want to go on a 40 day strike? I am telling you, Sir. Nothing works like a strike. Just take a chill pill and rest at home. They will immediately take interest in the interest rate, Sir. You are too mild and hence, they are putting pressure. Don’t worry. We are on your side.”

Now Rajan got seriously scared. “Listen, young man, this is no way to protest. We’ve got our own methods of protesting. Academic ones. Very dignified. After all, I am meeting with the FM early next month. I am sure I can convince the FM.”

“Excellent, Sir!” came in the youthful voice, now sounding uber-excited. “You’ve got FM on your side? Which one, Sir? 93.5 Red FM? Bajaate raho, Sir! Or 98.3 Radio Mirchi? It’s hot! And you’re so cool, Sir! Best for you is 94.3 Radio One. Maximum Music, Maximum Choice. But you are facing maximum music and minimum choice, Sir! Very clever of you to get media partners. Superb. Wish we had thought of this before.”

Aaaaaaaarrrrrgh! Now how do I tell this guy not to help me, Guv was thinking, when to his horror, came the next piece of advice.

“Rahul Gandhi is visiting us next week, Sir. To show solidarity to our cause. You want him in Mumbai? I’ll get him there.”

Rajan, who’d been stunned into silence with all these creative happenings, suddenly found his voice.

“Listen. I do NOT, I repeat, do NOT want Rahul Gandhi here. Ok? Neither do I want any of these strikes and banners. We’ll handle this our way own way.”

The Student’s President sounded a bit doubtful. “Are you sure? I’ve heard that once Yudhishthir comes to FTII, the other four Pandavas will come to the Monetary Policy Committee!”

Wonderful!! Had a smile throughout, and that’s what is important i guess!! The awesome thing in this is that is has an important message woven in inside humour!!! Autocracy vs Autonomy !! Good one Ma’am.. By the way isn’t it really difficult to stick to the word limit??

Oh, really difficult to stick to word limit.😨.. But now it’s growing on me 😀😀
autonomy of the central bank is so important and I thought a satire that you can’t have government servants on it was one way to give a piece of my mind to the government… Anyway thank you, Athreya 😊

FTII guys surely have an issue at hand but not sure what the fuss on RBI is..No one is taking any autonomy away!! This is how most so called modern central banks with an inflation targeting framework function…i don’t recall any MPC where Governor has so called veto power. And then the Governor himself was part of FSLRC which talked about modernising Indian financial laws..His own committee talked about similar ideas in 2008..

MPC members are going to have a position like Deputy Governors and who else but govt to appoint them? Govt appoints all regulators and MPC members are just that. Even in Bank of England Govt makes the appointments of MPC who also go through a grilling in Parliament..

Infact one should be following debate on what happened at Federal Reserve where regional Fed members are not appointed by the govt. There is a huge controversy on such appointments especially those in NY Fed who are said to be close to markets.

It is sad that currently much of noise on Indian monetary policy is not from the central bank’s perspective but hallowed Governor’s position. Nothing could be further from the truth.

Hi Amol! Thank you for the comments. Your “humble” post is extremely well-written and you’ve taken some fairly interesting digs at the “elite” economists 😛

Here is a take on the MPC from my side. And it is a bit of a counter-view to what you are saying.

1. It is not the veto issue, but the composition of the MPC that I find to be restrictive. There is no need for the Governor to have veto powers; as you so RIGHTLY say in your article, no other modern Central Bank has given those kind of powers to their bankers. We have to make the process more democratic and take decisions by consensus. I totally agree with you here. Further, as you say, whether we have 5 or 7 members in the MPC is also a non-issue. Agreed, again. How does it matter?

The Urjit Patel Committee, as you know, had suggested 5 members in the Committee, with the Governor, Dy. Governor and Executive Director (in charge of MP) of the RBI being 3 and 2 other appointees from the Government who are NOT office bearers in the Government, so that no conflict of interest becomes possible. There is no question of a veto and the policy decision will be by majority. This, to my mind, is acceptable.

Not because there are 5 people, but because the composition of the committee is biased towards RBI officers who have the actual responsibility of carrying out the monetary policy directives. In the FSLRC recommendations, the recommendation is to have 4 members that will be “non-RBI”, whereas there will only be 3 RBI officers.

2. Now for the most important point. Unlike many other “modern” Central banks, the RBI has never really received a mandate that its priority responsibility is to control inflation. So the RBI has always walked the tight rope challenge of “managing” inflation, while also supporting growth. In many modern Central Banks, the LEGAL mandate is benchmarking inflation and hence, even if the composition of the Committee is biased towards non-Central Bank representatives, the Committee works pretty smoothly because it HAS to deliver on inflation. The Fed is a case in point. In India, we run the risk of not having the legal and cultural backbone to do this.

I know, I know…the inflation targeting has come in, right? Yes, so the RBI CANNOT allow the inflation to go beyond 6% and below 2%. But if the inflation is say, at 4.5%. Now what should be the interest rate policy? Here, the culture of the policy balance does play a big role. And the culture is already biased towards supporting growth. Needless to say, the composition of the MPC becomes very relevant here.

3. The US Fed too has a 7 out of 12 members are suggested by the President and okayed by the Senate. So, the composition of the FOMC is biased towards the Government. These 7 members are experts from fields such as economics, finance, markets, etc. While the Fed’s decisions affect not only the US, but also ROW, its autonomy has NOT been seen to be its strength area. There are plenty of Banking Surveys that actually rank the Fed MUCH lower than banks (erstwhile) such as Germany and Switzerland and now the ECB, when it comes to an autonomy score. While an autonomy score is worked out using many parameters, excessive Government representation on the FOMC works anti-autonomy. And hence, while the US inflation has always been low, most banking surveys point out to the fact that it could have been lower! US Central Bank has never really delivered a rock solid low inflation environment such as Germany or Switzerland and one of the reasons has been lack of autonomy!

4. It has also been observed that across all countries, banks with higher autonomy always deliver lower inflation rates than banks with lower autonomy, read Government intervention in any format.

5. Finally, the RBI officers are anyway appointed by the Government (as they should be) and enjoy the confidence of the Government. They are mandated now to stick to an inflation target, which is a number that is decided in accordance with the views of the Government. To make the process democratic is also correct, but to set up an MPC with a composition with fewer members from the RBI…don’t you think this is unnecessarily restrictive?

Thanks for the comments. I hardly get comments on my blog and so nice to see so many commenting on your blog. And above all you replying to each of the posts..

I dont know but I guess all RBI employees are govt employees. What difference does it make if govt nominates MPC officials as well? Somehow there is always this perception that govt makes poor appointments which is not the case with RBI atleast. Given the choices facing RBI and Govt, MPC is going to be just another elite club of similar degrees, similar universities people. I don’t see much differences really. Forget difference of opinions.

I mean there is too much noise over RBI matters. And then for all you know nothing really happens. Look at SEBI for instance. There is zero hype and it has done remarkable job in last 25 years, From Harshad Mehta scam of 1992 to today, it has changed the entire equity market game completely. You remove the equity market game from India and India story falls flat too, SEBI hardly gets any credit which I think keeps it going as well.

And guess what, there have been hardly any economists etc driving the game. It has all been incredible team work and no one even knows who runs the show. Why can’t RBI be like this?

You mentioned Bundesbank and SNB in the post. Well one strong reason was that they didn’t really hype things. The hubris didn;t set in barring Bundesbank handling of 1990 reunification and SNB’s 2008 crisis management.

Having said that, I don’t know why we don;t debate a world without central banking? It is a classic central planner running the show and creating havoc with the system. Why can’t banks decide their rates based on their analysis? Just like other firms do in their respective sectors, why can’t banks be allowed to do the same? I mean regulation is fine but why set interest rates? Why should a regulator decide prices?

I have recently started to read free banking ideas and am amazed that this aspect of history has been omitted from all banks (like economic history and history of economic thought has been omitted). We deplore govt but just are made to believe central banks are critical for the system. Whereas, all central banks have come via govt. fiat and are to be questioned just like we do for givt. And for all you know, countries like Canada, Scotland, Australia etc did really well before their central bank came up. Even in India, it is really interesting to note that banking was far more freer than it is today. Banks could come and close as firms do. This is competition for you and 101 of economics.

Seeing the central banks role in recent years and how much their performance depends on luck, I am really sceptical of their roles in economic management. There is nothing more ironical than seeing most econs believing in free markets and don’t want intervention. But somehow believe in their fine tuning powers on being appointed a central banker.

Like Friedman himself said that eh would rather have a computer/machine manage the monetary policy than a person..